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That quintessentially American brand — Levi’s — expects to get the bulk of its sales overseas within the next three to five years.
As the San Francisco-based denim giant revealed strong earnings and revenues growth for the first quarter ended Feb. 24 — boosted by currency gains and lower restructuring charges — its president and chief executive officer, John Anderson, said the company faces a bumpy year. But it’s banking on international markets — namely China, India and Russia — as well as the women’s sector, for future growth.
Levi Strauss and Co. reported that earnings rose 12 percent to $97.1 million in the first quarter, compared with earnings of $86.6 million in the same period a year ago. The gain was also driven by a dramatic decrease in restructuring charges, which declined more than 80 percent to $2.2 million from $12.8 million. Interest expenses also declined significantly.
Revenues rose 4.4 percent to $1.08 billion from $1.04 billion. Sales also grew 4.4 percent to $1.06 billion from $1.02 billion.
The privately owned firm releases its financial results because of the publicly traded bonds that finance its debt.
Anderson said during a conference call with analysts that he was pleased with the results, given the difficult retail environment, particularly in the U.S. He conceded that the company faces significant challenges in its largest and most mature markets, and the tone of executives speaking during the call implied difficulties are expected to persist throughout the year.
Sales declines in the key markets such as the U.S. and Japan that began showing in 2007 have carried through to the first quarter of 2008. Revenues for the Americas fell 2 percent to $580 million, compared with revenues of $591 million a year ago. While the core Levi’s business in the U.S. saw gains, the anticipated difficulties with the mass channel Signature by Levi Strauss brand continued to depress results. A small decline in the Dockers business was also realized.
“The U.S. Levi’s brand is well positioned in the men’s category,” said Robert Hanson, president of the North American region. “We did see a decline in the women’s wholesale category in the first quarter.”
Hanson downplayed the impact of the Signature business, saying the brand represented a small part of overall sales. Signature accounted for 6 percent of sales in 2007, or about $256.2 million, down from 10 percent of sales, or $415.1 million, in 2005.
European revenues jumped 15 percent to $329 million from $286 million. However, excluding the benefits of currency exchange, revenues would have increased 3 percent. The European business is being driven by retail, while the wholesale business has seen some weakness.
“Customers have been more reluctant to build inventories in the face of economic uncertainty,” said Anderson of the European wholesale environment.
Asia-Pacific revenues rose 8 percent to $174 million from $161 million. Excluding currency benefits, revenues grew 3 percent. Japan has been a weak spot in the region and Anderson expects difficulties to continue. A new management team was put in place in the country last year, and Anderson admitted that the company had been off-trend during the year. He believes the new management and the trends are back on track.
Currently the business is relatively evenly split between domestic and international. Eventually, Anderson believes international markets will represent 60 percent of the business. During the first quarter, international growth came from emerging markets such as China, India and Russia, rather than mature markets like Japan or South Korea.
Still, the U.S. will need to find ways to generate growth in order to drive international expansion.
“It’s essential that the U.S. business remain strong to us,” Anderson told WWD during an interview at the company’s Garment District showroom here. “That’s where the company was born and that’s where our three brands were born. It gives us authenticity and legitimacy.”
Anderson said he was comfortable with how the business is positioned, given worsening economic conditions around the world.
“We’re feeling very good with where things are,” he said. “Last year was the best year we’ve had in a decade.”
In his nearly 30 years with the company, Anderson has worked in major markets including the U.S., Australia, Europe and Asia. He’s seen several ebbs and flows to the business in that time. As he nears the close of his second year as ceo, Anderson believes a more consistent focus on product and innovation will help weather economic difficulties and drive growth in emerging markets.
“Where we have struggled in the past, quite frankly, it’s been because we have taken the eye off product innovation and either someone else has stepped into that void or we just haven’t been as disciplined as we need to be to make sure we always delight the consumer,” he said.
For both the Levi’s brand and Dockers, Anderson is pegging the future on improving women’s offerings, with the goal of introducing head-to-toe product ranges. The company is also gearing up for a global push with its 501 style in all 110 countries it serves for the fall season. Prices for 501 will be raised to between $30 and $60, up from the current $25 to $35 range.
“We’ve been inconsistent,” said Anderson of Levi’s approach to the women’s market. “We’ve really focused on it for a couple of years and then have taken our eye off the market a bit….We really now have a full commitment. We have to be successful in our women’s business. I think that’s been the change.”
Expanding company-owned retail operations in the U.S. has been a focus of competitors like VF Corp. in recent years, a strategy that has helped brands better control their image and boost sales among retailers in the region. Levi’s has 73 stores in North America and will open a Times Square flagship in May. While the company has indicated it will continue to pursue retail opportunities, Anderson said there was no strategy in place to address the number of stores it plans to open in the U.S., or when or where.
“We would like to have a strong presence in all the major capital cities around the world, because we think that sets the tone for that marketplace,” he said.
Anderson stressed the company will remain predominantly a wholesale business in the U.S.